July 17, 2009
Links for 2009-07-17
Some quick remarks about the evidence for economic recovery, central bank independence, and Goldman Sachs.
Mike Bryan cautions about difficulties in interpreting seasonally adjusted numbers for new unemployment claims and inflation when the cyclical downturn has been as severe as this one.
Tim Duy looks at the ISM indexes, consumption, and auto sales, and concludes "mounting evidence points to the formation of a rather clear bottom in the most recent stage of this economic cycle." Even so, Tim's forecast is on the pessimistic side.
I joined many of my colleagues in urging Congress and the President to remember just how valuable an independent central bank is for the ordinary citizens of this country. You may not pay much attention to central bank independence. But you'll miss it when it's gone.
And Paul Krugman has this to say about record profits for Goldman Sachs:
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America. Second, it shows that Wall Street's bad habits-- above all, the system of compensation that helped cause the financial crisis-- have not gone away. Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Posted by James Hamilton at July 17, 2009 01:33 PMdigg this | reddit
Paul Krugman objected early to the Paulson proposal to purchase toxic assets. He proposed direct infusion of cash into the banking system instead. Paulson later accepted his proposal.
Both solutions share a common characteristic. They propose to rescue the banking system without reforming it. The focus on stimulus shares the same defect - more spending money without guarding against past mistakes.
Paul is a brilliant writer but he can be wrong sometimes, just like the rest of us.
This country needs reform, not an attempt to keep the old system going.
Posted by: ReformerR at July 17, 2009 05:56 PM
"You may not pay much attention to central bank independence. But you'll miss it when it's gone."
First, please redefine the mission. Fighting inflation is acceptable. how about "supporting economic growth" or "preserving the banking system"?
Congress needs to decide what the Central Bank should not do under what conditions and retain the right to reign them in when they exceed their mandate.
Preserving the banking system is a valid goal so long as said system is serving the interests of the economy by providing money to fund business and credit to households. When the banking system begins to focus on serving its own ends (creating profits out of gambling with each other in a rigged system), Congress should have some way of saying "Stop - turn around".
Independence in terms of deciding how to accomplish its mission. Not independence in deciding when it has strayed beyond its mission.
Posted by: ReformerRay at July 17, 2009 06:10 PM
The banks profits are fallacy,they would deserve to be re audited through sampling. The ongoing complicity in the financial spheres does not seem to be conductive of a real rehabilitation of the economies.
Nothing has changed Banks outsmarting the real economy and the rest struggling.
P Krugman is right,all the seeds and sediments are still here to blossom in a new crisis (most likely to be a debt crisis)
Posted by: PPCm at July 17, 2009 10:27 PM
"the evidence for economic recovery"
Evidence? Are you a commie? You appear to be stuck in the reality based industry. What you don't understand is that Larry, Timmy and Ben are part of the empire that creates reality.
Posted by: Barack W. O'Bushma at July 18, 2009 07:10 AM
Central Bank independence is not something that you legislate. Sure- you can insulate the bank somewhat through , for example, lengthy terms of service, but the core of independence is in the backbone and vision of the Chairman and other members that serve. In recent years the Fed has lost its vision - it gave us multiple bubbles and it failed to prevent the derivatives debacle. Now the Fed is trying to redeem itself through massive backdoor spending. Fed policies may be characterized as institutional convenience - a win/win situation for them. For example, the Fed acquiesced and supported financial deregulation and the general hands off approach to financial markets consistent with the governing political party. The Fed had no shortage of justifications for their stance. On bubbles, the Fed told us that they were hard to identify, that the market would self-correct, that the time lags in Fed policy might do more harm than good, that it was not the Feds job to substitute its opinion for the markets'. In other words, it was convenient for the Fed to subordinate itself to the going political climate - that way you avoid the resulting "heat" - a win for the Fed. The story gets even better for the Fed. When events go badly, as with the derivatives debacle, you can save the nation with massive backdoor spending. It's a win/win policy for the Fed.
Posted by: fwm at July 18, 2009 08:13 AM
The Federal Reserve has only two congressional mandates as confirmed by both Alan Greenspan and Ben Bernanke: to promote 1) full employment and 2) stable prices.
This mandate does not allow the FED to be independent forcing the FED to attempt to hit two targets with one arrow. This mandate has created a paradox for the FED. Based on Keynesian-Phillips curve theory they expand the money supply in an attempt to increase employment but then prices become unstable so they institute policies to hold prices down which in theory creates more unemployment.
The result is that the FED works directly with Treasury and must coordinate with congress as they pass legislation.
Professor, I understand your intent, but perhaps more importantly I understand the intent of Treasury and Congress and they absolutely will not allow an independent FED. Since money was invented government has used it to steal from the people whether clipping coins or imposing stimulus plans.
Posted by: DickF at July 20, 2009 07:11 AM
Paul Krugman wrote:
...it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
This is just another example of a whole list of examples of how awful a writer Krugman is. Not one person lost a house because someone at Goldman got a raise. They lost their home because, as Krugman does correctly point out, "Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers." But these subprime mortgages and mortgage-backed securities were created by Fannie and Freddie so that they could continue to feed the real estate boom. Goldman and others were simply the instruments to flow these toxic assets to other investors. Goldman Execs got huge raises because they were good at doing what the government (can you say Barnie Frank) wanted them to do and the goverment has rewarded them handsomely for it.
One last Krugman stupidity, the economy was not "financialized" because of deregulation by the Reagan administration. It became "financialized" after Richard "we are all Keynesians now" Nixon floated the dollar and institutions stepped up to create instruments to hedge against monetary instability. The Reagan years were years of monetary stability in a sea of monetary instability that has once again reared its ugly head.
Posted by: Anonymous at July 20, 2009 09:03 AM
"Central bank independence" is a fig leaf. Central banks were created by governments to serve their long term financial needs, when nations outgrew the ability of commercial banks to satisfy those needs. Holland,I think, was first in the 1600s. The fig leaf is useful for governments to sell the idea to the populus. Its also useful for the central bank to give them maneuvering room. So both parties maintain the mantra. When governments stop getting the long term results they want from their central bank, they change them. Its called reform, but so much for "central bank independence". Check out the history of central banks - you'll see - Bank of England, J.P. Morgan saving the US system in 1907, etc.
Posted by: Mike Laird at July 20, 2009 02:09 PM
Mike Laird: The Federal Reserve Act was passed in 1913. What is the U.S. central bank of 1907 to which you refer?
I do not see how anyone could deny that the ECB is institutionally better insulated from fiscal pressures than the U.S. Federal Reserve, or that the U.S. Federal Reserve is institutionally better insulated from fiscal pressures than is the Reserve Bank of Zimbabwe.
Posted by: JDH at July 20, 2009 03:16 PM
As an Obama supporter (overall, versus the - ugh! - alternatives), I cringed when I saw the GS numbers. GS is clearly earning its profits primarily from politics, not markets, and I don't doubt that some of that will be obvious enough for Republican muckrakers to figure out and utilize in the 2010 campaign.
Posted by: Tom at July 20, 2009 03:26 PM
JDH, as you know, there wasn't a US central bank in 1907. You probably know that J.P. Morgan, as a private banker, provided the funds to stop the panic of 1907, when governments were unable. But he really tweaked the President and other Federal officials in his behavior while providing the funds. The financial panic and the personal abuse of government officials made it clear that a central bank was needed in the US because private commercial banks could not be counted on. The US had out-grown them. That's my point. Hence the Fed Act in 1913. It has happened in every major economy since the 1600s.
I presume you are correct about various central banks being better or worse insulated from day to day pressures. Still, central banks are created by and serve as an instrument of a national government. When the national government does not get the results they want, change happens. Central banks are not independent - only insulated to varying degrees from various pressures. Maybe that's what you meant to say? It leads to a discussion of what pressures and what insulation is appropriate, rather than blanket statements about "independence" that does not exist.
Posted by: Mike Laird at July 22, 2009 02:13 PM
Regarding Fed independence.
The fed sets policy. Policy is political.
If you don't like politics, that's understandable. However, the idea that the Fed can somehow really be above politics is merely to engage in self-deception.
Posted by: Matt at anarchyjapan at July 22, 2009 04:10 PM